U.S. Is Said to Offer Another $30 Billion in Funds to A.I.G.

The United States is planning its fourth round of aid to the American International Group, the giant insurer. The government already owns nearly 80 percent of the insurers holding company.Credit
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The federal government agreed Sunday night to provide an additional $30 billion in taxpayer money to the American International Group and loosen the terms of its huge loan to the insurer, which is preparing to report a $62 billion loss on Monday, the biggest quarterly loss in history, people involved in the discussions said.

The intervention would be the fourth time that the United States has had to step in to help A.I.G., the giant insurer, avert bankruptcy. The government already owns nearly 80 percent of the insurer’s holding company as a result of the earlier interventions, which included a $60 billion loan, a $40 billion purchase of preferred shares and $50 billion to soak up the company’s toxic assets.

Federal officials, who worked feverishly over the weekend to complete the restructuring, said they thought they had no choice but to prop up A.I.G., because its business and trading activities are so intricately woven through the world’s banking system.

But the deal also presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises.

The government’s commitment to A.I.G. far eclipses its rescue of other financial companies, including Citigroup, which has received $50 billion in rescue financing, and Bank of America, with $45 billion.

Credit rating agencies like Moody’s, Fitch Ratings and Standard & Poor’s had been preparing to sharply downgrade A.I.G.’s credit ratings on Monday because of the record quarterly loss. That would have forced A.I.G. to default on its debt, threatening to set off shock waves throughout the financial system as banks holding A.I.G. derivatives contracts would probably demand cash collateral and other payments from A.I.G. during a time when it has little to spare.

The major credit-rating agencies were briefed on the pending deal between A.I.G. and the government, the people involved in the talks said, and they have committed not to downgrade the company’s debt as a result.

Under the deal, the government will commit $30 billion in cash to A.I.G. from the Troubled Asset Relief Program, should the company need it, according to the people involved in the talks. A.I.G. is not expected to draw down the money immediately, but the government’s commitment was enough to satisfy the rating agencies.

Another part of the deal would allow A.I.G. to exchange some of its preferred nonvoting shares, which paid a 10 percent dividend, for new preferred shares that do not require a dividend. That would save A.I.G. $4 billion annually.

To further ease A.I.G.’s debt burden, some of its other debt to the government would be converted into equity in two of the insurer’s subsidiaries in Asia — American International Assurance and the American Life Insurance Company.

Both units are performing well. This would give the government direct ownership in those subsidiaries and provide saleable assets to American taxpayers even if the A.I.G. holding company were to default on its loans.

The government stake in American International Assurance is likely to be controversial. The unit had been put up for sale recently, without success. That suggests that the government is giving A.I.G. better terms than private investors were willing to give, exposing the government to further accusations that it is providing a handout to A.I.G.

Also as part of the deal, the government would agree to lower the interest rate on all remaining A.I.G. debt to match the London Interbank Offered Rate, or Libor. That would replace the previous rate, which was three percentage points higher than Libor. That move would save A.I.G. $1 billion in interest payments.

The loss that A.I.G. is preparing to report on Monday would be the largest ever by any company in a single quarter. Still, of the $62 billion loss being reported, only about $2 billion is a cash loss. The rest is the result of noncash items like write-downs on the value of the company’s assets.

The new cash commitment reached on Sunday represented the fourth time since September that the federal government has taken steps to keep A.I.G. from collapsing. The previous rescues were intended to stabilize A.I.G. and buy it time to restructure. But the rescues were insufficient, in part because A.I.G. has either invested in or insured so many assets that keep losing value as the economy sours.

In September, the Federal Reserve lent A.I.G. $85 billion when the company suddenly found itself unable to meet a round of cash calls. To secure the emergency loan, A.I.G. issued the Fed warrants for slightly less than 80 percent of the company’s shares.

Officials said at the time that they thought the loan would provide A.I.G. all the cash it could possibly need. The government brought in a seasoned insurance executive, Edward M. Liddy, to sell off some of A.I.G.’s operating units to raise money, since the rescue loan had to be paid back within two years. Mr. Liddy drew up a plan, saying he expected a smaller, well-capitalized version of A.I.G. to remain after the restructuring.

But in just weeks it became clear that A.I.G.’s problems were so grave the $85 billion would not be enough. It was using up that money alarmingly fast, thus burdening itself with higher than expected debt-servicing costs, because it had to pay the Fed a higher rate of interest on the part of the loan that it drew down.

In October, the government cut A.I.G. some slack by creating a new $38 billion facility to shore up its securities lending business, and gave the company access to a new commercial paper program, which had a much lower interest rate than the rescue loan.

But that was not enough either. In mid-November, the government restructured its loans to A.I.G., raising its total commitment to $150 billion. The new arrangement reduced the rescue loan to $60 billion and stretched out its term to five years instead of two.

At the same time, it injected $40 billion into A.I.G. in exchange for preferred shares. And it created two special-purpose entities to take the most toxic assets then plaguing A.I.G. out of play.

Those arrangements kept the government’s stake in A.I.G. at just below 80 percent. The government has not wanted to go above 80 percent, because it would then have to consolidate all of A.I.G.’s assets and liabilities into its own finances, putting taxpayers on the hook for the claims of roughly 76 million insurance policyholders around the world.